The author is a Forbes contributor. The opinions expressed are those of the writer.

Loading ...

Loading ...

This story appears in the {{article.article.magazine.pretty_date}} issue of {{article.article.magazine.pubName}}. Subscribe

To Raise Money Or Not?

Over the years I've had hundreds of discussions with entrepreneurs about raising money. It's a conversation I still have a few times a week with founders everywhere. As the press continues to report daily about company X getting funded to the tune of millions, my conversations about the same have gotten even more frequent. I'm writing this post so that I can refer most of the entrepreneurs I talk with to a place where my thoughts reside on raising money for their business. Maybe the title gave this away already, but if you received a link to this post from me, it means I don't think you should raise money for your business. Perhaps some others will agree with me and point you here as well. Either way, here are the reasons why, in no particular order, you shouldn't try to raise money.

Because you cannot generate enough sales. Generally speaking, investor money isn't meant to pay your salary, or others, if you haven't figured out yet how to get customers to pay you. Please note I said cannot, not will not. Companies like Twitter certainly can generate money from customers thru ads and other means, but for years they chose not to as they figured it out. They raised money (and still might again) to make it thru this gap. Also, they had customers all around the world. Their customer growth curve is the chart of every entrepreneurs dreams. So if you are adding customers so fast you can't see straight, and you have a lot of ideas around how to monetize them, then you can potentially disregard this. Otherwise, well ... you know.

Using the same Twitter example, the founding team had a strong previous track record of success. The founders raised money before and sold their companies, thus creating an ROI for their investors. That single thing increased their chance of raising money again maybe 10,000x. But what about first timers? Someone could invest in you for your first time as well. However, it is hugely important to note that when raising money ahead of revenue and/or a product with customers, you either need to have a team of super talented stars that shine under the light, or, like in the case of Twitter, are a proven commodity that has previous performance to point towards.

You don't have a talented team that is working on this full time. Raising money isn't meant to allow you or your partners to quit your jobs. That's supposed to have already happened. Why? Because you are willing to take that risk ahead of funding (well ahead, not just a month or two), or because the business growth demanded it. Raising money to make key hires is certainly a legitimate use of funds. You and your co-founders are not key hires though. I do think you should consider timing it well -- no need to just off and quit your job based on pure excitement. Have a plan, or better yet, a product/service and some customers.

The business you are already building has a very legitimate chance to be extremely large. There are two important pieces to this consideration. First, notice I said "already building". For 99% of the entrepreneurs that raise money, they are doing so based on something more advanced than an idea. Ideas don't get funded (see #2 above for exceptions). Second, you have to be brutally honest with yourself about the potential size of your business. If you are doing the "...we only need 1% of a $10B market and..." kind of stuff, then you are already in trouble. Perhaps the more important question to ask yourself isn't whether or not your business can be very large, but rather, do you and your team have an idea of how to do it? If I can cure cancer, there is no doubt I'll have a very large business. However, it is very clear to me that I have no idea how to do it. I wish it were this obvious, but most of the time it isn't. Chances are you are working on a good business, with solid potential and a legitimate chance to make it. This doesn't equate to a business that should raise money.

Because you can. That's right, some people can successfully raise money, especially in a hot market (like now) but that doesn't mean they should. I've watched some talented entrepreneurs bring on investors when I don't think they should have. Then why did they? It can appear easier to build a business with money in the bank. I've done it both ways. I can tell you that both come with challenges for sure. However, every business I've started without investor money has HAD to succeed because of customer demand and acceptable margins. Investor money can create a false sense of reality in the marketplace. There is something to be said for building a business on customer money versus investor money. However, there is an interesting option that comes out of businesses funded by customer revenue -- investors love them! If you want to raise money down the road, having a business that is already succeeding is the best way I've ever seen to do so.

To some, this may seem like the thing you are supposed to do. You read about it everywhere, you see every successful company doing it. So if you want to succeed, that is what you need to do, right? Wrong. Some statistics I've read have the number of companies that successfully raise money at about 0.2% -- that is two tenths of one percent. So what about the other 99.8% of the companies out there that succeed without investor capital? Yeah, that's most likely you. Embrace that!

I realize there are exceptions to every rule. I'm quite sure I didn't get this totally correct. Some of you out there have had experiences otherwise. Do you agree or disagree with my assertions? I'd love to hear from you in the comments. You can also find me on Twitter here. In the meantime, if you are reading this, then you are likely part of the 99% that will not raise money for their business. So spend your time and talents on figuring out who your customer is and what they want. That will pay off more than an investment will any day.